In response to the threats posed by climate change, the Paris Agreement set out international goals of keeping the global temperature rise well below 2 degrees Celsius above pre-industrial levels, and of strengthening the ability of countries to adapt to a changing climate. To meet those goals, nations will have to undertake massive regulatory reform and a shift, among other things, from fossil fuels to renewable energy, that are likely to be incompatible with existing international investment agreements.
International environmental regulations and international investment law have traditionally been conceived of as incompatible. Investment arbitration has been used to attack domestic environmental regulations by affected foreign investors. There is a concern that the threat of ISDS liability and costly damages will cause “regulatory chill.” That is, State will avoid adopting measures to combat climate change because of potential investment arbitration claims by foreign investors who are affected by the regulatory changes. However, the context in which environmental issues arise and the manner in which arbitral tribunal dispose of these issues has significantly evolved over the years. Recent developments point to ways in which investment arbitration may be used to promote the goals set out in the Paris Agreement.
On February 15, 2018, in the latest award arising out of Spain’s photovoltaic investment disputes, a tribunal held that Spain breached its Energy Charter Treaty (ECT) fair and equitable treatment obligation through changes to its regulatory framework in 2013-2014. The tribunal valued the investor’s damages at EUR 61.3 million. After initial losses in the Charanne and the Isolux arbitrations, this is the second recorded victory for investors (the first being Eiser v. Spain, release May 4, 2017) a series of claims brought by investors in the renewable energy sector against Spain.
Spain introduced generous incentive systems for investments in the production of electricity from renewables in 2004 and expanded the investment scheme in 2007. This attracted a number of foreign and national investors and led to increased investment in renewable energy projects. However, these incentive schemes began to cause a tariff deficit (gap between the tariffs collected and the associated real costs) in the context of the financial crisis of 2008, and the Spanish government responded by implementing cutbacks to the incentives through regulatory reforms in 2010, and altogether eliminating them through regulatory reforms in 2013 and 2014. These changes to Spain’s renewables scheme caused significant losses to investors, and has resulted in over thirty pending investment arbitration claims against Spain under the ECT and bilateral investment treaties (BITs).
Similar claims have been brought against Bulgaria, the Czech Republic, and Italy, and in 2016, a NAFTA tribunal held Canada liable for breaching the fair and equitable treatment obligation under Article 1105 of NAFTA when Ontario placed a moratorium on the construction of an off-shore wind power plant.
These sorts of claims reflect one way investors have used investment arbitration to coerce states into complying with their international environmental obligations. The “stick” being the threat of damages. In the case of Spain, the damages arising out of the tariff deficit and ECT claims are now estimated to exceed $9.5 billion. It begs the question whether such tactics promote or undercut climate mitigation and adaptation in the long term. There is the risk that states will feel locked in to a particular means of achieving climate mitigation and adaptation goals despite later developments pointing to a different method as being preferable. Large scale and high profile cases such as these in which a nation is strong-armed by individual investors into following a course of action it does not want are also prone to institutional credibility attacks. The European Commission has responded by launching an attack on the legitimacy of the ECT process. The long-term effect on the renewable energy market of such uses of investment arbitration are yet to be seen.
Beyond the energy context, there is precedent for state liability for other action or inaction in violation of environmental obligations which negatively affects foreign investment. In Allard v. Barbados, a Canadian investor who owns a nature sanctuary in Barbados brought a claim under the Canada-Barbados BIT alleging that the government of Barbados failed to take adequate measures to prevent environmental degradation that negatively affected the ecotourism value of his facility. Allard accused Barbados of failing to abide by its international obligations under the Convention on Wetlands and Convention on Biological Diversity. While the claimant lost on the merits, the framework for analyzing such a claim that was set forth by the tribunal leaves the door open to future successful claims. For instance, with respect to Allard’s fair and equitable treatment claims, the tribunal states:
- What is determinative here is that Mr. Allard’s investment was conditional neither on any general expressions of positive environmental policy, such as those found in the 1986 Plan, the 1995 Cummins Letter, and the First and Second ARA Reports, nor on any representations concerning the management and operation of the Sluice Gate.
The tribunal then concludes that “the Claimant failed to established that (1) Barbados made any specific representations to the Claimant; and that (2) the Claimant relied on any such representation in acquiring and developing the Sanctuary.” One could easily imagine a situation involving losses due to coastal sea-level rise where, given current science and flood-mapping, the legitimate expectations of the investor would be more likely to give rise to liability. Moreover, the tribunal in Allard set out environmentalist-friendly jurisdictional determinations. To this point, the tribunal states that “expectation s of an eventual profit were honestly held by Mr. Allard when establishing the Sanctuary in 1996 and thereafter, notwithstanding that during the sanctuary’s establishment and operations factors of profit were considered secondary in the background to his principal motivations of environmental and public purposes.” And adds that the Barbados’s argument that Allard’s claims were for future harms, rather than actual losses or damages, was not sufficiently raised during the jurisdictional phase of the proceedings, and that in any event, “the fact that other finding made in this Award dispose of all the Claimant’s claims suffices to make otiose to admit this ground for consideration.” In a sense, this decision is opening the door for claims brought by individuals for whom profit motives were only secondary, and for whom the harm alleged is potentially at least in part to be felt in the future.
There is also the potential for states to bring claims against investors under international treaties. These claims typically arise in the form of counterclaims, though a direct claim may be possible, if a treaty is interpreted to allow for it. In Perenco v. Ecuador, Perenco initially brought a claim against Ecuador due to changes in Ecuadorian legislation that allegedly violated its rights under an investment agreement. Ecuador launched a counterclaim against Perenco claiming that Perenco violated local environmental legislation by, among other things, failing to inform the state of several oil spills. According to Ecuador, these failures resulted in an environmental disaster in the Amazon for which the damages amounts to $2.5 billion. The tribunal issued a decision in favor of Ecuador’s counterclaim, but determined that ascertaining appropriate damages would require a long and expensive investigation, and encouraged the parties to settled. In a subsequent dispute involving a similar counterclaim by Ecuador against a different investor, the tribunal granted $41.8 million to Ecuador in respect to its environmental counterclaim.
These recent developments reflect the evolving relationship between climate policy and international investment arbitration.
Leila Mgaloblishvili is a second-year J.D. student at Columbia Law School and a Staff Editor for the Columbia Journal of Transnational Law. She holds a B.A. from Columbia University, where she studied economics and art history.